Dangote Sugar Refinery’s major challenge this year is that cost of sales isn’t letting any increase in sales drop down into profit. Management, therefore, has to look elsewhere other than sales revenue in order to build profit. No other income line is meeting the need neither is any cost-saving good enough to stretch out margins.
The sugar refining company is therefore managing to keep the profit from falling. The company’s half-year operations ended in June 2020 shows just a 5 percent improvement in the bottom line against over 28 percent growth in sales year-on-year. Not a naira of the roughly N23 billion increase in sales revenue formed part of the profit for the period.
The problem is input cost, which grew ahead of turnover at 39 percent compared to 28.4 percent and claimed more than all the increase in sales revenue during the period. The cost of sales claimed almost 80 kobo of every naira of sales revenue at half-year, rising from under 74 kobo in the same period last year.
It had been expected that the backward integration project the company started in 2018 would enable it to reduce input costs and stretch out margins. The reverse is rather the case with profit margin down to the lowest level in four years at 11 percent at the end of June 2020.
The company’s sales revenue remained down from 2017 high at the end of last year. There was however an improvement of 7 percent from the four-year low in 2018. There is a further gain in momentum this year so far with good prospects for returning to the previous revenue peak at the end of the current financial year.
The sugar company ended the first half of the year in June 2020 with sales revenue of over N103 billion. This is an increase of 28.4 percent year-on-year – the highest revenue growth rate since 2017. The company’s revenue comes from sales of refined sugar and molasses as well as some freight income.
Based on the current growth rate, the company may see a full recovery of sales revenue at the end of the year. Its peak sales revenue was N204.4 billion it reported at the end of 2017.
The problem is that it isn’t able to build profit along with sales revenue. Profit isn’t likely to come anywhere close to the nearly N40 million peak it recorded at the end of 2017.
The main hindrance is input cost, which continues to press forward to erode gross profit. At N82.4 billion, input cost pushed up by 39 percent year-on-year at the end of half-year, leading to a marginal decline of gross profit to less than N21 billion. This means all the net increase in sales revenue was insufficient to meet the increase in the cost of sales during the period.
Outstanding growth in other income plus a decline in selling and distribution expenses helped the company to make up for the decline in gross profit. Operating profit, therefore, closed flat at N17.4 billion for the period.
Another challenge came from net finance cost – which advanced from only N82 million in the same period last year to almost N1.5 billion at the end of June 2020. The impact of that was further extended by a drop of close to one-half in investment income to N308 million over the review period.
Rising finance expenses came largely from an exchange loss of N1.3 billion during the first half of the year. The company had balance sheet debts of only N1.2 billion at the end of the period. Investment income is going down for the third year in a row after dropping by close to 76 percent at the end of 2019.
There was however a saving grace for the company from fair value adjustment – which changed position from a loss of N343 million in the same period last year to a gain of N824 million at the end of half-year. This countered the impacts of the increase in net finance expenses and the drop in investment income and kept pre-tax profit flat at N17 billion for the first half of the financial year.
The summary of the company’s earnings story at the end of half-year is that management is unable to convert growing revenue into profit. The result is a further weakening of profit margin for the sugar refining company. Despite a big blow from a huge exchange loss, the company was, however, able to keep profit from falling.
The profit margin continued declining from 14.6 percent in 2018 to 13.9 percent at the end of 2019 and further to 11 percent at the end of June 2020. Profit margin had peaked at 19.5 percent in 2017.
The company closed the half year operations with after tax profit of N11.6 billion, an improvement of 5.5 percent year-on-year. Last year, it also managed to keep profit up marginally at a 1.7 percent improvement to N22 billion.
The company earned 97 kobo per share at the end of June 2020, improving from 92 kobo per share in the same period in 2019. It earned N1.87 per share at the end of 2019.
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